The "Fat Pitch" Myth

by Cullen Roche, The Pragmatic Capitalist

I was intrigued by comments in this interview with Marc Faber of the Gloom, Boom and Doom Report.  He said:

“I am hoping for the market to drop 40% so stocks will again become, from a value perspective, attractive again…I think stocks are, by and large, fully priced.”

I run into this sort of thinking quite a bit.  It’s the idea that you’re just going to sit on your cash and wait for the next fat pitch and then hit the big home run that sets you on the path to financial freedom.  After all, that’s what hot shot investors like Warren Buffett do, right?  Buffett famously talked about how he likes to wait for “fat pitches”:

“I call investing the greatest business in the world,” he says, “because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”

…

“Wait for a fat pitch and then swing for the fences.”

I really don’t like this way of thinking about the world of asset management and I think it blurs the line between what someone like Buffett does and what most of the rest of us do when we allocate assets.  Most importantly, it distorts what we really should be trying to do. Here’s my reasoning:

• Warren Buffett does not always engage in market transactions that resemble anything remotely close to what the rest of us do.  Buffett is a true “investor” in the sense that he is often fronting capital for future production.  And the process by which he does so generally involves a tremendous amount of information or competitive advantage that the rest of us simply don’t have.  Buffett is getting fat pitches thrown at him all the time.  For instance, he had General Electric and Goldman Sachs, two of the most prominent firms in history, banging down his door begging to give him high yielding warrants in 2008.  The rest of us couldn’t get that “fat pitch” in our wildest dreams.  It’s a pitch most of us will never even see because it doesn’t get thrown to the average person.

• The “fat pitch” myth assumes that you actually know what a fat pitch is to begin with.  It assumes that the next time the markets slide you’ll be able to know when there are superior “values” in the market or that you’ll be able to control your emotions better than everyone else as you time the bottom of the market and ride it back up to riches.  Maybe you can do that.  But the odds are that you won’t know when the market is a good “value” any better than when your dog will know the market is a good “value”.

• The “fat pitch” myth misses the way most of us get rich in markets.  Most people who make sizeable gains in the markets do not swing for the fences or try to hit home runs.  Sure, the home run hitters are always the people who garner the most attention.  But they’re also a fairly rare occurrence and the fact that someone hit a 800 foot home run in 2008 doesn’t mean that person was necessarily talented or doing something that can be replicated.  The thing is, most of us get wealthy in the markets by hitting lots of singles, doubles and just getting on base a lot.  The best part about the market is that you don’t have to swing a lot.  But that doesn’t mean you have to wait for fat pitches to try to hit out of the park.  In fact, a lot of the time the market will help you score runs by simply doing nothing (ie, walking a lot).  The key to success in this business isn’t about hitting home runs and swinging for the fences.  It’s about getting on base a lot and scoring runs efficiently and consistently over a long period of time.

The bottom line: don’t fall for the fat pitch myth.  It’s more likely to lead you astray as you try to maintain your portfolio over the long-term.

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